IRS ADDS $327 MIL. TO UAL'S TAX TAB

WASHINGTON -- UAL Corp.'s turbulent relationship with the Internal Revenue Service just got $326.6 million rougher.

That's how much the IRS is demanding that the Elk Grove Township-based parent of United Airlines pay in additional taxes for 1988-90. This year's IRS ruling is in addition to the $111 million the agency sought last year from the airline company in 1983-84 and 1986-87 back taxes.

UAL filed petitions asking the U.S. Tax Court here to overturn the IRS rulings in both cases.

Fred T. Goldberg Jr., a Washington tax attorney for the company, declined comment, as did a UAL spokesman. An IRS spokesman said the agency does not comment on pending tax cases.

UAL claimed the IRS erred when it ruled that $149.2 million in inspection and maintenance costs had to be depreciated over a number of years rather than deducted as annual business expenses, and that $1.3 billion in 1991-93 losses could not be taken against 1988-90 income.

According to the petition, the IRS informed the company that using the losses against 1988-90 income was being denied as "a precautionary matter" because of possible 1991-93 tax return adjustments that could result in additional taxes being sought for those years as well.

As a result of the IRS decision, the taxable income of UAL Corp. and its 117 subsidiaries was increased $765.5 million for 1988, $493.6 million for 1989 and $51.9 million for 1990.

The petition claimed that UAL should be able to write off inspection and maintenance costs of its fleet of up to 429 Boeing, Lockheed and McDonnell Douglas aircraft it operated during those three years rather than having the expenses capitalized and depreciated.

"Such inspections and incidental maintenance and repairs did not materially increase the value of the aircraft or appreciably prolong their useful lives," the petition argued. "None of the inspections and incidental maintenance and repairs constituted a general plan of rehabilitation."

Instead, the IRS ruled that the costs had to be depreciated over five to seven years, resulting in UAL's taxable income being increased by $149.2 million for 1988-90.

The IRS notice of deficiency was issued July 9, and the agency has 60 days to respond to the company's Oct. 12 petition. If the IRS and UAL fail to negotiate a settlement, the case could go to trial before a tax court judge.

Last December, the company filed a petition claiming the IRS erred by denying the employee-owned company deductions for travel expenses it paid its 6,150 pilots and 12,000 flight attendants during 1983-84 and 1986-87.

Under union contracts, that petition said, the company was obligated to pay its pilots $37.20 per day -- and flight attendants $36 per day -- to cover meals and incidental expenses while on overnight and day flights. But the IRS would allow deductions of only $14 daily, resulting in the company being denied more than $165 million in deductions.

The IRS also denied the company credit for foreign taxes paid during those four tax years.